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Advisors To Recommend Cap On Health Benefits Eclusion

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The Bush administration’s Tax Reform Panel says it probably will recommend a cap of either $11,500 or $8,400 per employee per year on employers’ tax exclusion for health benefits expenditures.[@@]

The panel held its final face-to-face meeting Tuesday and is supposed to send U.S. Treasury Secretary John Snow a package of tax reform proposals Nov. 1.

The chairman of the panel, Connie Mack, a former Republican senator from Florida, said panel members had scheduled an Oct. 27 teleconference.

C-SPAN 2 carried a telecast of the Tuesday meeting, but, at press time, the panel had not posted any summaries, let alone any detailed descriptions, of the reform proposals on its Web site, at

Panel officials said at the final face-to-face meeting that they would be presenting at least 2 proposals.

One proposal will call for the government to create a “simplified income tax” system that would eliminate many tax breaks, kill the much loathed alternative minimum tax, and reduce the number of tax brackets to 3, from 6.

The other proposal, for a “progressive” consumption tax,” would make sweeping changes to the U.S. tax system.

For families, a progressive consumption tax would be like access to an “unlimited” Roth individual retirement account, which gives taxpayers the ability to avoid paying taxes on capital gains and investment income, according to Liz Ann Saunders, chief investment strategist at Charles Schwab Corp., San Francisco.

If the progressive consumption tax system proposal were adopted, individuals, families and sole proprietors would pay taxes only on wages and would not have to pay taxes on investment income or gains.

Businesses could write off investments on equipment immediately and pay taxes mainly on cash flow.

The simplified income tax proposal would cap the employer exclusion for expenditures on group health benefits to $5,000 for individuals and $11,500 for families, or about the level of expenditures made by the federal government.

Authors of the progressive consumption tax proposal, who need to come up with more extra revenue to make their plan “revenue neutral,” would create a new tax break for purchasers of individual health coverage, but they would cap the employer exclusion at just $4,000 for individuals and $8,400 for families.

Adoption of the proposals might eliminate many of the retirement plans, health plans and other plans now on the market, such as 401(k) plans, 529 college savings plans and the new health savings accounts, by replacing them with personal “save for retirement” accounts, employment-based “save for work” retirement accounts, and personal “save for family” accounts, which could be used to pay health care bills and college bills.

The tax panel also wants to replace the current deduction for mortgage interest with a 15% tax credit for any mortgage interest paid. The panelists would limit eligibility for the credit to mortgages that fall within the Federal Housing Administration loan limit. Even in the most expensive parts of the country, where habitable homes that cost less than $400,000 are rare, the maximum FHA limit is under $350,000.

Under the progressive consumption tax proposal, the $8,400 cap on the group health tax exclusion would be indexed, but the indexing would be tied to the Consumer Price Index, which rises relatively slowly, rather than to increases in the actual cost of health coverage, Saunders said.

That could cause problems by discouraging the purchase of health coverage, Saunders warned.

Panelists also expressed concern about an odd aspect of the progressive consumption tax proposal: Wealthy people who get all of their income from investment earnings might not pay any taxes at all.

Elizabeth Garrett, a member of the panel who is a professor at the University of Southern California, said that the tax situation of wealthy coupon clippers would be much more fair than it looks on the surface.

“The tax is paid,” Garrett said. “It’s just paid on the business side.”

But another panelist, John Breaux, a former Democratic senator from North Carolina, said the idea of wealthy investors getting by without paying taxes bothers him, even though he believes he understands the economic concept behind that tax structure.

“I don’t know that I’d be comfortable trying to sell that,” Breaux said.


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